Systematic Risk Analysis Jessica Trundle Upper Iowa Universi ✓ Solved

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12systematic Risk Analysisjessica Trundleupper Iowa University B

Systematic risks analysis is very crucial when determining the events that can possibly affect the economy. The systematic risks involved in the US macroeconomic landscape include health crises (such as COVID-19), global demand fluctuations, and the political landscape exemplified by US elections. After considering these three systematic risks, an investment allocation of one million American dollars would be structured as follows: 60% allocated to US Equity and stocks, 20% for US Treasury bonds, and the remaining 20% for cash.

The justifications for these allocations are as follows. First, the allocation of 20% for cash is essential as it serves as an emergency fund, providing options for future investments and offering a sense of security should unforeseen circumstances arise. Cash reserves offer a buffer that ensures survival during downturns. Secondly, the allocation of 20% to bonds, although personally not favored, is justified by their capacity to address uncertainties and their fixed payment structures over a specified period that help cover other expenses. Moreover, diversifying into different asset classes, such as bonds, is a prudent strategy.

Lastly, the decision to allocate 60% to US equity is based on the belief that the US economy will rebound rapidly. Many stocks are currently undervalued, rendering a 60% investment in US Equity a strategic move. In conclusion, my investment of one million dollars will be structured as 60% US Equity, 20% US Treasury Bonds, and 20% cash.

Asset Classes Analysis

The three asset classes that require analysis each have diverse earning potentials and are influenced by different factors. The aim, in this case, is to maximize earnings over the next twelve months, which entails allocating funds based on each asset’s earning potential. U.S. Equities will receive 50% of the total investment, amounting to $500,000. This sizeable allocation can be attributed to the relatively short maturity period of equities, which is typically within twelve months. In scenarios where the share prices rise, selling the equities can yield considerable profits.

Investing in profitable U.S. companies promises high returns, particularly as these entities tend to distribute substantial dividends. Conversely, 10% of the total investment will be allocated to U.S. Treasury bonds. This minimal allocation is due to their long maturation period of 10 to 30 years, which fails to align with the goal of increased revenues within the twelve-month timeframe. Additionally, the fixed returns from a treasury bond render the investment stagnant for the specified period.

Cash assets will account for 40% of the investment, translating to $400,000. Even though cash may not yield fixed returns, it provides ample access to opportunities that may arise during the twelve months. Having this liquidity allows investors to purchase undervalued assets and later sell them at a profit. Hence, cash can significantly contribute to earnings in a short span.

Corporate Finance Management

The American economy remains one of the most stable and thriving economies globally. Prior to making corporate financial decisions in the U.S., it is essential to evaluate the various factors influencing asset returns. When considering the three areas of investment—U.S. equities, treasury bonds, and cash—the allocation of $1,000,000 needs careful assessment.

U.S. Equities should receive approximately 50% of the total allocation because their returns are substantially dependent on the performance of the industry at large. As most U.S. companies are continuously profitable, it is advisable to target equities from firms that regularly post significant profits to ensure favorable returns. In this regard, 30% of the investment should be allocated to U.S. Treasury bonds, primarily due to their maturity within six months to one year, ultimately yielding appealing interest rates by year-end. Treasury bonds also provide predictable income since they are backed by government obligations, which is advantageous in unstable market conditions.

The remaining portion of the investment should be kept in cash, reinforcing the strategy of preserving liquidity for potential future investment opportunities. With the U.S. economy being favorable for equities and Treasury bonds, these should take precedence in the investment blueprint for the next twelve months.

References

  • Brunel, J. L., Idzorek, C. T. M., & Mulvey, C. J. M. (2020). Principles of Asset Allocation. Portfolio Management in Practice, Volume 1: Investment Management.
  • Campos, J., Sharma, P., Gabiria, U. G., Jantunen, E., & Baglee, D. (2017). A big data analytical architecture for the Asset Management. Procedia CIRP.
  • Durham, J. B. (2020). U.S. Treasury Bond Betas: 1961–2019. The Journal of Fixed Income.
  • Zaremba, A., Kambouris, G. D., & Karathanasopoulos, A. (2019). Two centuries of global financial market integration: Equities, government bonds, treasury bills, and currencies. Economics Letters.

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